A Chapter 13 bankruptcy is designed for individuals with regular income who desire to pay their debts but are currently unable to
do so. The purpose of chapter 13 bankruptcy is to enable individual debtors to propose and perform a repayment plan under which creditors
are paid over an extended period of time. Under this chapter, debtors are permitted to repay creditors, in full or in part, in installments
over a three year to five year period. Under a chapter 13 bankruptcy plan you will not lose your property.
Any individual, even if
self-employed or operating an unincorporated business, is eligible for chapter 13 bankruptcy relief as long as the individuals unsecured
debts are less than $269,250 and secured debts are less than $807,750. An individual cannot file chapter 13 bankruptcy or any other
chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear
before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy
court to recover property upon which they hold liens.
How Chapter 13 Bankruptcy Works
Chapter 13 then affords the debtor a right to
cure defaults on long-term home mortgage debts by bringing the payments current over a reasonable period of time. The debtor is permitted
to cure a default with respect to a lien on the debtors principal residence up until the completion of a foreclosure sale under state
law.
Another benefit of Chapter 13 is that you can "cram down" the value of debts for secured property. What this means is that you
are only required to repay the market value of the property in your chapter 13 plan regardless of what amount is owed. For example,
if you owe $20,000 on a car that is worth only $15,000, you would only have to repay $15,000. However, the cram down provision does
not apply to long term debts that cannot be paid off during the life of the plan such as your home mortgage and under the new bankruptcy
changes, it only applies to debts that are at least 910 days (2 ½ years) old.
The Repayment Plan
The debtor must file a plan of repayment
with the petition or within fifteen days thereafter, unless extended by the court for cause. The proposed chapter 13 plan usually
must commit all projected "disposable income" to repayment of the debts. Disposable income is defined as income not reasonably necessary
for the maintenance or support of the debtor or dependents. Within thirty days after the filing of the plan, the debtor must start
making payments to the trustee even if the plan has not yet been approved by the court. If the plan is confirmed by the bankruptcy
judge, the chapter 13 bankruptcy trustee begins to distribution of the funds received in accordance with the plan.
Once the court
confirms the plan, it is the responsibility of the debtor to make the plan succeed. The debtor must make regular payments to the trustee,
which will require adjustment to living on a fixed budget for a prolonged period. Usually, the payments are made through a deduction
from the debtors paycheck. Failure to make the payments in accordance with the confirmed plan may result in dismissal of the case
or its conversion to a liquidation case under
Chapter 7 of the Bankruptcy Code.
A repayment plan must be at least 36 months, and no
longer than 60 months depending on the debtor's income.
Chapter 13 Bankruptcy Discharge
Upon completion of the plan, you are entitled
to a discharge of any remaining balances owed on any accounts provided for in the plan. Of course, secured debts will not be discharged
until they are paid in full if you wish to keep the secured property. A debtor may not receive a discharge in a Chapter 13 case if
they received a discharge in a case filed under chapter 13 during the 2-year period preceding the date of the order for relief in
the Chapter 13 case.
Effective October 17, 2005, all Ch. 7 & Ch. 13 debtors must complete a Financial Management Course before
they receive a discharge of debts.
